Export controls and sanctions have become convenient tools for governments worldwide following the Cold War. While the trade community hopes for fewer trade controls and sanctions, the opposite has emerged. Both U.S. and international sanctions programs have grown since 1991. Sanctions programs are occasionally curtailed – as we are witnessing in Cuba – yet trends show sanctions growth outpacing relaxation. United Nations Sanctions
The United Nations (UN) has imposed sanctions 32 times on 21 different countries since the USSR’s fall. Reasons for sanctioning countries and entities continue to expand: nuclear proliferation (e.g. Iran and North Korea), civil wars (e.g. Democratic Republic of the Congo, Sudan, etc.) and terrorism sanctions (e.g. Syria, etc.). Of the 13 UN sanctions programs remaining in place, 12 restrict access to both military goods and dual-use items with military and weapons of mass destruction (WMD) applications.
“Smart” sanctions define the modern era. In the 1990s, broad sanctions failed to neuter aggressive Iraqi policy. Experts, therefore, recommended targeting specific groups, entities, or persons within a country who engaged in WMD activity, terrorism, or violated certain foreign policy goals. Currently, UN sanctioned entities total 366, with the most recent additions resulting from ongoing conflicts in Syria and Iraq.
Alongside growth in international sanctions, governments are now building more comprehensive export control systems. Specifically, the 2004 UN Security Council Resolution (UNSCR) 1540 called upon all states to adopt export and related trade controls on dual-use items with WMD applications. Some 48 countries now have comprehensive export control frameworks with license requirements for both military and dual-use items. Although many of these countries have yet to fully implement and enforce their controls, companies will need to prepare for this growing global compliance challenge over the next five years. Compliance professionals must now focus their attention beyond just Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR). US Sanctions Trends
Since the demise of the Soviet Union, U.S. sanctions expanded to address proliferation, human rights, terrorism, drug trafficking, and other foreign policy goals. The 1990s was a decade of so-called “rogue states” — Iran, Iraq, Libya and North Korea — pursuing weapons of mass destruction. Rogue states prompted sustained focus from the United States and its allies on nonproliferation controls and sanctions. During this period, the US Congress passed the Iran-Iraq Nonproliferation Act of 1992. In the 2000s, more sanctions laws followed, including the Iran Nonproliferation Act of 2000, the Iran and Syria Nonproliferation Act of 2005, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, and other legislation designed to limit trade and investment with entities and countries of concern.
After 9/11, the United States directed sanctions against terrorists, state sponsors of terrorism, and countries in conflict. President Bush signed Executive Order 13224 which blocked the property of designated persons and entities engaged in terrorism activities. The U.S. Treasury’s Office of Foreign Assets Control (OFAC) steadily broadened the scope of its sanctions programs targeting entities and persons of concern for terrorism. Presidents Bush and Obama also used authorities under the International Emergency Economic Powers Act to impose a broad array of trade sanctions on Iran and others.
Whereas OFAC has targeted a growing number of entities, the Departments of Commerce and State have also mandated that US companies screen a growing number of lists to avoid doing business with “violators”, proliferators, and uncertain or shady end-users. Several prominent lists by the Bureau of Industry and Security include: Denied Persons, Unverified, Entity. Prominent lists by OFAC include: AECA Debarred and Nonproliferations Sanctions.
Domestic Foreign Policy
Sanctions are no longer confined to the federal level. New York, California and Florida have all passed laws banning contracts with companies holding business ties to Iran. In 2007, California’s legislature passed the California Public Divest From Iran Act, which prohibits state pension funds from investing in companies that do business in Iran in energy and defense sectors. Florida followed suit, and New York state announced plans to dump companies connected with Iran’s energy or defense sector from its state retirement fund.
These state sanctions are, in fact, tied to federal legislation – namely the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA). CISADA allows state and local governments to divest or prohibit investment of state and local government assets in “any person that the State or local government determines, using credible information available to the public, engages in investment activities in Iran.” Trickle-Down Sanctions
In addition to international, federal and state sanctions, public organizations are now exerting pressure on both governments and companies for everything from investment in Iran to conflict diamonds. Once NGOs or other interest groups deem state or corporate behavior problematic, they will directly lobby and deter against trade with particular persons and entities.
For example, the American Israel Public Affairs Committee (AIPAC) lobbies in favor of theNuclear Free Iran Act of 2015, which would bolster sanctions if Iran does not comply with US-Iran nuclear talks. Global Witness, which focuses on natural resources’ impact on conflict and human rights, currently pushes for increased sanctions against Zimbabwe’s state-owned diamond company ZMDC for human rights abuses. The upward trend of sanctions presents a challenge for corporate compliance to track not only government regulations, but the diverse agendas of interest groups. Mitigating Sanctions Risk
Global companies should prepare now for further complexity in sanctions and export control compliance. Trade compliance teams will need to assess the control and sanctions regimes in all locales where trade is being undertaken. Although risk and complexity are greatest in the United States where enforcement is more robust, increased implementation of export controls and sanctions abroad will require greater attention. This includes assessing differences in control lists, black lists, classification, and policies.
Over the next three to five years, expect to see greater use of trade controls and sanctions for achieving foreign policy, national security and other objectives. Compliance complexity will continue unabated.
US Embargo on Cuba
While opportunities and new possibilities for US-Cuban trade are emerging, the Cuban leadership, realities on the ground and evolving US and Cuban regulations will define the new relationship between these countries. Economic rapprochement will be a gradual, and often frustrating, step-by-step process with surprises and challenges.
Cuba’s Mariel Deep Water Container Port – the most modern container terminal in Latin America – opened in 2014
Following President Barack Obama’s December 17 announcement of US policy change with Cuba, the US Departments of Treasury and Commerce released formal amendments in January to the US Embargo Against Cuba. Amendments to the Cuban Assets Control Regulations (CACR) and Export Administration Regulations (EAR) signal functional steps toward political and economic normalization.
Significant US regulatory changes result in liberalized travel, remittances, telecommunications, financial services, trade and shipping. New Department of Commerce rules for trade with Cuba authorize export of building materials, equipment and tools for construction, and agriculture to the Cuban private sector. In addition, US companies may now export telecommunications products to improve the free flow of information to, from, and among the Cuban people.
US jurisdiction still prohibits doing business or investing in Cuba unless licensed by the Office of Foreign Assets Control (OFAC). OFAC’s general license permits exports from the US, and re-exports of 100% US-origin items from third countries. Such exports are allowed only in cases where the export or re-export is licensed by Commerce. Trade delegations may travel to Cuba only if delegates qualify for an applicable general license authorizing travel to Cuba or obtain a specific license from OFAC. TradeSecure can help US companies navigate these key sanctions and the controls which remain in place. Normalizing Relations
Economic normalization requires dismantlement of the US trade embargo. Much work remains, instrumentally and attitudinally. Most Cuban businesses remain as State Owned Enterprises and unlikely partners for US businesses. The cautious Cuban leadership continues to be wary of entering into transparent and open trade relations with the US. They will likely only permit what they want, and restrict what they do not want.
TradeSecure advises close examination of Cuba’s progress in any calculations regarding business opportunities and trade. Normalization will require Cuba to adopt numerous international protocols and engage with institutions. At this point, Cuba holds no membership in the World Bank, Inter-American Development Bank and International Monetary Fund. While US-Cuban normalization will expedite Cuban participation in international financial institutions, membership in trade and technology control regimes— such as the Wassenaar Arrangement —will take even longer.
Involvement in trade fairs, export control workshops and technical exchanges can establish foundation for entering the Cuban market. TradeSecure reccomends participation in these as a way to meet Cuban counterparts, establish confidence and increase visibility. Follow these links to The Cuban Earth Sciences Convention and Fair 4-8 May 2015 and theHavana International (Trade) Fair 1-30 November 2015 to see examples of opportunities to engage with Cuban joint ventures and State Owned Enterprises.
US businesses should remain focused and realistic regarding opportunities for trade with Cuba. TradeSecure believes Cuban leaders will likely move slowly, determined to maintain control of domestic economic activities. President Raul Castro and other leaders desire paths that will provide Cuba autonomy while integrating it into the world community – politically, economically, and socially. Cuba’s leadership may erect barriers to trade in an effort to maintain one-party control of politics and the economy thereby limiting access to or interaction with the US market.
Cuba’s ability to sustain foreign investments, pay for imports and dictate authoritarian policies will define the new status quo. Change is coming, although it will likely remain slow. TradeSecure recommends US companies continue to monitor closely both the opportunities and obstacles in this evolving relationship.
Important Amendments to HKSAR Strategic Commodities Control List
The Trade and Industry Department of the Government of Hong Kong Special Administrative Region (TID) released an Import and Export Regulations Order for Strategic Commodities (Amendment of Schedule 1) on 30 January. On 4 February, the Legislative Council of Hong Kong tabled the Order. TradeSecure is monitoring when the Order will come into force.
The Order modifies Category 3, 4, and 5 of the Strategic Commodities Control List. TID’s changes in dual-use licensing for electronics, computers, and telecommunications facilitate industry’s access to high technology and reflect changes from the December 2014 Plenary of the Wassenaar Arrangement.
Export control updates in this Order appear in five forms:
1. Removal of control requirements will affect:
3A002(a) — certain recording equipment
2. Relaxation of control requirements will affect:
3A001(a)(5)(a)(1) — certain analog to digital converters
3E002(b) — specific technology for the development or production of microprocessor, microcircuit, microcomputer microcircuit, or microcontroller microcircuit core
4A003(b) — certain digital computers
4D001(b)(1) — certain software
4E001(b)(1) — certain technology specially designed or modified for the development or production of digital computers
3. Clarification of control requirements will affect:
3A001(b)(2) — certain microwave monolithic integrated circuits (MMIC) power amplifiers
3A001(b)(3) — certain discrete microwave transistors
3A001(b)(4) — certain microwave solid state amplifiers
3A002(a)(6) — certain digital instrumentation data recorder systems
3A002(d) — certain frequency synthesized signal generators
5A001(b)(5)(b) — certain digitally controlled radio receivers
4. Addition of new control requirements will affect:
3A001(a) Note 2 — three dimensional integrated circuits
3A002(d) — certain real time oscilloscopes
4A005 — certain systems, equipment and components for generating, operating, or communicating with intrusion software
4D004 — certain software specially designed or modified for generating, operating or communicating with intrusion software
4E001(c) — certain technology used for the development of intrusion software
5A001(j) — certain IP network communications surveillance systems or equipment and specially designed components
5. Addition of new Technical Notes will affect:
3A001(b) — peak saturated power output
The Order contains an Order Annex categorizing export control updates by Category Code:
Detailed updates from TID Director-General of Trade and Industry, Mr. Kenneth Mak, are posted in Government of Hong Kong SAR Gazette.
Overlooked Risk: US Anti-Boycott Legislation
In the context of the recent Israeli-Palestinian military conflict, the Arab League economic boycott of Israel, while moribund, lingers as a symbolic gesture of Arab protestation. US entities still face the risk of economic penalties and/or the loss of other trade-related advantages if their products or services become part of any boycott. Given recent events in Gaza and initiatives such as Boycott, Divestment and Sanctions Movement (BDS), increased requests and pressure to participate are likely in the near term.
Even before Israel’s founding in 1948, many Arab countries sought to economically undermine Israeli business in Palestinian territories. Following the war of Israeli independence, a formal boycott targeted Israel, non-Israelis economically tied to Israel, and perceived Israeli supporters. Boycott enforcement was left to member state’s discretion.
In 1977, the US Congress made boycott cooperation illegal for US companies and authorized imposition of civil and criminal penalties against violators. Embedding legislative intent in the Export Administration Act (EAA) and the Ribicoff Amendment to the 1976 Tax Reform Act (TRA) gave Departments of Commerce and Treasury oversight and enforcement for boycott issues. Rules promulgated by Commerce through the Export Administration Regulations (EAR) prohibit boycott compliance, whereas the relevant portion of the Internal Revenue Code (IRC) does not prohibit but penalizes compliance.
Both the EAR and TRA anti-boycott provisions are complicated in practice, outlining a range of categorical violations rather than a control list or embargo destinations. In the case of the EAR, there are six categories of prohibited conduct and a corresponding range of singularly outlined exceptions. The IRC captures non-prohibited but actionable behaviors under the concept “boycott participation,” a designation more reminiscent of maritime impressment than sanctions busting.
For EAR anti-boycott violations, a full spectrum of penalties apply:
Civil: $250,000 per violation (or twice the value of the transaction, whichever is greater)
Criminal: Penalties of $1 million per violation or 20 years imprisonment.
Under the TRA, US government tax benefits for exporters can be voided by boycott compliance. These benefits include, among others, a foreign tax credit, the benefits for foreign sales corporation (FSC) since repealed, and a tax deferral available to US shareholders of a controlled foreign corporation (CFC).
Regulations require US persons to report boycott compliance requests. Commerce and Treasury offer compliance reporting forms, which in the case of Treasury includes a thoughtful appendix to a tax return. The reporting data allows for managing anti-boycott risk by being conveniently disaggregated to reveal requesting country and the gamut of boycott requests categories.
While not as prominent as EAR export control violation enforcement actions, anti-boycott busts are not insignificant. In the case of TRA violations, the loss of tax-related deductions and increased risk of future scrutiny are substantial indirect costs. Economic Statecraft
The historical trend correlating increased anti-boycott requests with Palestinian-Israeli conflicts is palpable. Since the 2008-09 Gaza War, for example, the average boycott compliance request rate was 697 requests per year, a 375 request increase above the previous three-year period. BIS fines from 2013 were the largest since 1996.
In February 2014, Israeli Foreign Minister Avigdor Lieberman announced creation of a new interministerial team to fight efforts to boycott Israel. Concurrently, US House Representatives Peter Roskam and Dan Lipinski introduced anti-BDS legislation barring federally-funded US universities from joining boycotts of academic institutions. Although their bill failed to pass, it signals survival of US anti-boycott legislation. Drafts of other bills to augment current US anti-boycott laws and regulations are circulating. Given the complexity of these laws, it is important that US companies ensure compliance through enhanced awareness, training and due diligence.
The Cold War Reprised
Since the collapse of the Soviet Union, analysts have labored under the protracted notion of “post-Cold War” as the descriptive term to characterize the past twenty years. Recent events along the East-West axis have tested this moribund concept: it would seem we are very much back in the Cold War.
With the annexation of Crimea, Russia’s alleged involvement in the downing of a passenger airliner, accusations of Russian abrogation of the Intermediate-Range Nuclear Forces (INF) and Conventional Forces in Europe (CFE) treaties, and its variegated support for pro-independence insurgents in eastern Ukraine, Moscow is regaining its former Soviet footing. In a response reminiscent of the Coordinating Committee on Multilateral Export Controls (COCOM), the West, the U.S. government and the European Union (EU) announced further sanctions against Russia for the annexation of Crimea and alleged involvement in eastern Ukraine.
Technology denial was the basis upon which the Western Cold War offensive was waged. Russia’s post-Soviet export control rehabilitation through the 1990s, including association in the multilateral export control arrangements such as the Wassenaar Arrangement., increased military and dual-use trade flow with the West.
Today, the West is reprising its practices of technology denial. The newest sanctions are again targeting technology transfers, including oil and gas, arms, and dual-use products. There are considerable implications for EU and U.S. businesses. Given the present spiral, it is very unlikely economic relations, let alone political, will be normalized in the near-term.
Supply Chains Delinked
From satellites to shipbuilding, Russian high tech production has become increasingly integrated into Western supply chains since the dissolution of the Soviet Union. Russian military production has been deeply connected with Ukrainian suppliers, a legacy of Soviet-era military production. To the degree sanctions will impact supply chains for their military production and next generation research, Moscow will be very keen to acquire requisite technologies. Non-Western suppliers are not really options given quality and reliability concerns. Given this gap, Russian initiatives to acquire these technologies will increase, thereby posing risks to EU and U.S. producers and suppliers.
Be prepared for a long-haul.
Yesterday, President Vladimir Putin directed his government to begin imposing a range of counter-sanctions, such as banning Polish apple imports. More seriously, there has also been discussions about banning trans-Siberian overflights.
Record high popular support among Russians for President Putin makes him an entrenched recusant. His negotiating style will become increasingly inflexible, particularly given the sunk costs to Moscow of annexing Crimea.
The larger U.S. and EU strategic context suggests an intractable medium-term. The continued crisis in eastern Ukraine and Russia’s alleged INF violations portend a steady-state sanctions future, and familiar in its Cold War strictures of economic statecraft. Even with a magical volte face on support for eastern Ukraine, unrolling sanctions would take significant time.
Companies with business in Russia should adjust accordingly. Likewise, companies and financial houses should expand their know-your-customer (KYC) risk management protocols to include all Russian end-users.
A Modi-Fied India
A welter of activity is taking place within the Government of India (GOI) in the first 30 days of the new Narenda Modi government taking over. The right-wing Bharatiya Janata Party (BJP), under Modi’s leadership, swept into power with 282 seats in the 542-member Lok Sabha (House of Representatives) on 16 May. Counting its allies in the National Democratic Alliance (NDA), BJP holds 336 of 543 seats. This gives Mr. Modi a mandate that is unprecedented for any Indian government since the 1980s.
Markets reacted extremely positively to Mr. Modi’s election, and the buoyancy continues as we hear daily reports of how campaign themes of efficient governance, timely implementation of programs and accountability are being fulfilled in the new government through major institutional and policy changes.
Foreign investors in India are changing investment strategies to favor domestic-oriented companies, mid-cap stocks and state-owned enterprises, based on expectation that the government will incentivize/force better performance from these. India has received net foreign portfolio flows of $10 billion so far this year, more than other emerging markets in Asia. Planned appointment of a Special Envoy for Development Diplomacy will further facilitate foreign investment into India, especially from Asia and the Gulf Cooperation Council (GCC).
Foreign policy initiatives include diplomatic overtures to Pakistan, Bangladesh and Bhutan; hosting delegations from France and China; plans for the Modi’s visit to Japan in August and the United States in September. Public expectations of positive change in governance and market expectations about rationalized policies remain high.
Streamlining the World’s Largest Democracy
A smaller cabinet of 46 Ministers and Ministers of State, with all major portfolios firmly in BJP hands, suggests few options for allies to interfere on major policy decisions. This has been accompanied by the dissolution of the system of formal and highly inefficient coordination between Ministries through Empowered Groups of Ministers and Groups of Ministers (EGOMS & GOMs).
In his first interaction with 70 senior bureaucrats across the Ministries, Mr. Modi encouraged every department to identify and repeal 10 rules or processes, and even archaic Acts that are redundant and would impact efficiency. Each Ministry was to provide a 10-slide 10-minute presentation to him, summarizing the top-10 decisions that can be implemented without delay, decisions that need to be re-worked, and the top-5 priorities/projects for the Ministry in the next 365 days.
Ministers holding multiple portfolios are expected to sort out matters informally. As a result, the long-delayed environmental clearances for projects like a naval base in Karwar used by the navy and civilian ships intended to take the load off Mumbai port, and a radar station on Narcondam island in the Andamans, have been issued when the Environment Minister and the Power Minister met over coffee. The Environment Ministry is also trying to fast-track roads and defense projects classified as strategic. Radar and telecommunications projects within 100 km (62 miles) of the 4,000-km (2,500-mile) border with China, large parts of which are disputed, will be put on an automatic approval list.
The Finance ministry is keen to allow at least 49% investment in all sectors, barring a few strategic ones, to stimulate overseas interest. This 49% investment will be allowed through the automatic route, without requiring time-consuming government approval. Defense, railways, e-commerce and media benefit significantly from this type of liberalization. India’s defense budget was more than $30 billion last year, and it already imports more weaponry than any other country.
The new government is focused on the creation of dedicated regional hubs for manufacturing, flexibility in labor laws, a safety net for workers, and rationalization of taxes. The government is also looking at tax measures that would remove hurdles in the way of manufacturing without hurting revenue. Such changes would be in line with the government’s resolve to move to a unified goods and services tax (GST) regime expeditiously.
Expanded Foreign Cooperation
A multi-billion dollar infra-fund amounting to US $4-5 billion is likely to be set up within 6 months to incentivize foreign and domestic investments into the infrastructure sector. Reportedly, investors will be able to avail of a minimum commitment guarantee of 3% on any PPP (Public Private Partnership) project. Japanese and Korean investors have already shown interest in participating in the fund.
The government has also decided to form a Nuclear Insurance Pool which will have a number of stakeholders, including General Insurance Company, the only re-insurer in the country, to meet the requirement of huge financial cover in case of a mishap. The volume of the pool will depend on how the government contributes to it for every project. This is expected to pave the way for accelerating work on power reactors at Kudankulam (Russia), Jaitapur (France) and kick-off planned nuclear projects with US companies.
The first budget of the new government is likely to be presented on July 11. Most India-observers expect this to provide the true roadmap for national economic priorities – beyond clearing the back log of projects and initiatives held up by the past regime. Change momentum is building, and businesses from Japan, US, Germany UK, Singapore and China are showing their willingness to do business with the Modi-fied India.
The Return of Cold War Sanctions?
Cold War Sanctions
I recall vividly the frustration of making a phone call within the Soviet Union during 1988. It was like trying to hear someone underwater with the static of a jet engine. “Ivan, hello…..ssssssssss…what ….ssssss…. can you hear me?”
At the time, the Soviet Union lacked modern telecommunications systems. Throughout the Cold War, the U.S. and Western allies maintained trade controls that restricted strategic items, including telecommunications equipment, from sale to the Soviet Union and Warsaw Pact countries. The U.S. and its allies worked through the Coordinating Committee for Multilateral Export Controls (COCOM) to ban exports of any items that might enhance Soviet military capabilities. This blockade deprived the Soviets of access to Western technology.
As the Cold War ended, the U.S. gradually lifted these trade controls, and COCOM was disbanded. U.S. and Western export controls shifted from blocking strategic trade with former communist states to controlling trade in dual-use technologies that could be used by rogue states for chemical, biological and nuclear weapons. Russia became a partner in these nonproliferation efforts, joining the Missile Technology Control Regime and other nonproliferation arrangements. The U.S. even worked with Russia to implement a modern regulatory system of dual-use export controls.
Scientific collaboration and academic exchanges flourished. The U.S. national laboratories engaged their Russian counterparts in cooperative projects on previously forbidden technical issues. The U.S. reached out to Russia’s aerospace entities, forming commercial joint ventures for trade, space launches, and cooperation on the International Space Station.
The Collapse of U.S.-Russia Relations
Recent years have seen a decline in U.S. relations with Russia. Issues complicating relations presently include differences over the handling of the civil war in Syria, Iran’s nuclear program, the Caucasus, Libya, and the political direction of Ukraine. While the broad Cold War trade controls of yesteryear are dead, they have been replaced with a new type of micro sanctions and targeted controls.
With Russia’s recent annexation of Crimea, U.S.-Russia relations are matched in a contest of mutual sanctioning, though so far mostly symbolic. The U.S. imposed three rounds of sanctions targeting individuals and institutions. The sanctions list has steadily grown, and the U.S. is employing more restrictive export controls. The State Department and the Department of Commerce announced their intent in April to deny exports to Russia of any products and technologies that “contribute to Russia’s military capabilities.” The U.S. Department of Energy (DOE) implemented a ban on Russian scientists working in its laboratories and restricted DOE travel to Russia except for projects related to nuclear security and nonproliferation.
Not surprisingly, Russia has countered, imposing similar travel bans on members of Congress. Deputy Prime Minister Dmitriy Rogozin, a target of U.S. sanctions, stated Russia may withdraw from the International Space Station. In response to U.S. sanctions, the Export Control Commission (ECC), also chaired by Rogozin, is likely to restrict exports of other Russian strategic items to the U.S.
More critically, Russia may end its supply of RD-180s, the workhorse rocket engines used to launch U.S. commercial and military payloads. Currently, the U.S. only has a two year supply of RD-180s. Alternatives to this engine include the untested SpaceX Falcon Heavy or the Aerojet Rocketdyne AR-1. The AR-1 would not enter production for four years, assuming government funding is quickly approved. Losing the RD-180 supply places severe limitations on the U.S. ability to address launch requests. Are More U.S. Sanctions Coming?
U.S. success in coordinating a multilateral response is far more unlikely today than during the Cold War era. Russia will use its gas and other resources to drive a wedge between the U.S. and its European partners to counter hard hitting sanctions. Its leverage against U.S. and E.U. sanctions has been enhanced by signing an agreement to provide $400 billion in natural gas to China over 30 years.
This agreement with China does not completely remove Europe from Russian strategic planning, though. Russian gas shipments to Europe net $30 USD more per thousand cubic meters than to China, meaning Russia will not pivot to China exclusively in the short term. Likewise, Europe receives 30% of its natural gas supply from Russia, which cannot be easily replaced. Russia demonstrated this leverage on June 16 when Gazprom cut off natural gas supplies to Ukraine. Russia’s energy resources provide the Kremlin with a tool to thwart a hard-hitting and coordinated sanctions response.
Russia’s resource wealth and global business connections will limit the impact of sanctions and temper the fervor of U.S. partners to expand sanctions. Europe is too dependent on Russia and too exposed at the moment to join a strong multilateral sanctions regime. Increased U.S. sanctions and tighter Russia-focused export controls are likely. The U.S. has a long history of using unilateral sanctions and export controls to press foreign policy goals and to signal its disapproval of other government’s behavior. The U.S. propensity to sanction has not diminished.
Regardless, Russia is not going to reverse on Ukraine. Putin considers its future central to Russia’s core national interests. Russia will continue to meddle to prevent a united Ukraine that leans towards Europe.
As a result, the U.S. will continue to impose additional targeted sanctions and tighter export controls that signal disapproval of Russia’s interference in Ukraine. In turn, Russia will use its limited levers of influence to block transfers of aerospace products and technology to the U.S. while at the same time seeking to create division within the Western allies and any coordinated response.